Policymakers wrestling with a hostile economy and worsening climate are earnestly looking to financial innovation for help but are not always happy with hot innovative products of recent years such as green bonds, ministers and advisers have warned.
Rania Al-Mashat, Egypt’s minister of international co-operation, said of African finance ministers meeting recently to prepare for next month’s COP27 climate conference that “their ask from the international community includes innovative financing tools”.
Debt swaps linked to sustainability outcomes have been mentioned repeatedly in discussions at this week’s Annual Meetings.
In November 2021 Belize issued a $364m blue bond guaranteed by the US Development Finance Corp and hence paying low coupons. It used proceeds to buy back expensive old bonds far below their face value. Some of the savings are committed to marine conservation.
Last month, Barbados conducted a similar transaction that impressed market participants because it made the deal work even though there was much less room in the discount for investors — around 92.5 cents in the dollar rather than Belize's 55 cents.
“There are instruments already being used that could be more widely applicable [such as] debt for climate swaps,” said Adedoyin Salami, chief economic adviser to the president of Nigeria. “What that saves countries like ours is that you can pay in local currency for projects… without having to be looking for dollars to service your debt.”
GREEN BOND PENALTY
There have been disappointments, however. “Unfortunately, the market does not reward issuing green bonds,” said Mohamed Maait, Egypt’s minister of finance.
“It is punishing those who issue green bonds, because you get [financing] at roughly the same cost as a [normal] Eurobond, but after issuing you start paying additional cost for reporting: you have to hire a consulting firm. So, you make a headache for yourself without any reward.”
In October 2020 Egypt issued a $750m green bond, which achieved its lowest ever five year yield, 5.25%. Bankers said it had attracted a lot of demand from new investors.
Maait still believes innovative financing mechanisms are important, “including green and blue bonds and debt swaps for biodiversity and sustainable development”.
He argued that reducing the cost of green borrowing “has to be addressed… particularly during this tough time… for increasing debt distress, which all of us now in developing countries are under.”
Maait called on commercial financial institutions to “help us design models… to reward us when we go for financing climate change adaptation or mitigation”.
Uruguay is preparing to issue its first sustainability-linked bond, which will be innovative in having a coupon that can step down if it hits targets on cutting greenhouse gas emissions and maintaining natural forests.
Azucena Arbaleche, Uruguay’s minister of economy and finance, argued that loans made by MDBs could be structured the same way. “Who is going to pay the stepdown if we have good environmental behaviour?” she asked. “Who will give the MDB the money? We think that developed countries have to share the dividends of the development they have done in the past, because they have been polluters. It’s time that they deliver concrete resources for middle income countries in these correct instruments.”